Future returns for a 60/40 portfolio

[Ready]

DH and I have been doing some financial planning lately which has required us to think about future portfolio returns. He is retired, but will receive income from his former company for ten more years, at which point he will turn 65. His income is enough to cover our bills entirely, so any SWR projections we need to think about would be based on whatever our portfolio is worth ten years from now.

He has the option of taking another job to earn extra income, and he keeps asking me if we have enough now, or if he should look for some part time work. My challenge is trying to figure out how much our portfolio will be worth in ten years, and what income a 3-4% SWR would generate for us on the portfolio's ten year from now valuation.

Historically a 60/40 portfolio, all index funds, periodically rebalanced, yields about 8%. However, trying to crystal ball what the returns over the next ten years might be, especially with interest rates currently being so low, is a bit challenging.

I know nobody here has a crystal ball, but what range of returns would you all consider using in doing this forecasting exercise? A very low rate would suggest that DH doing some part time work makes sense, so it has a bit of impact on lifestyle to assume very low numbers.

 

[pb4uski]

One approach is to make a significant haircut to 8% and see if you are still good to go. I used 5.5% in my planning for my 60/40 portfolio and I consider that to be quite conservative. You could simply just use different rates and see at what rate you plan
"breaks" and see if you think you can beat that rate.

Firecalc and other similar planners sort of build that conservatism in that it sees if you can weather a historical worst case scenario.

 

[MichaelB]

Historically a 60/40 portfolio, all index funds, periodically rebalanced, yields about 8%. However, trying to crystal ball what the returns over the next ten years might be, especially with interest rates currently being so low, is a bit challenging.

I know nobody here has a crystal ball, but what range of returns would you all consider using in doing this forecasting exercise? A very low rate would suggest that DH doing some part time work makes sense, so it has a bit of impact on lifestyle to assume very low numbers.

We're retired and the portfolio is our sole source of funds. Now instead of thinking about future returns I focus on portfolio survival probability because it is more relevant to our situation. What matters is not what return we get, only that our portfolio last longer than we do. For that I use FIRCalc and add my own assumptions for things like health and LTC.

 

[trirod]

Not that this means anything but I use 5.8% for projecting out my 60/40 portfolio (7% for stocks and 4% for bonds - weighted average is 5.8%). I have a spreadsheet set up that shows expected returns based on this percentage, but of course real life doesn't work that way. So to make any serious decisions I use FireCalc and any other retirement projectors I can find, then add some cushion (how much depends on the day of the week, phase of the moon etc.).

 

[target2019]

This calculator has a simplified view of returns. You can dial in the AA you want and see historical results.

There is a small grid icon at the upper right, and clicking that gives you the average return calculation.

https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk

 

[NW-Bound]

Very cool graphical tool. However, it looks like it gives nominal returns, meaning inflation has not been accounted for.

 

[pb4uski]

Virtually all reported returns are nominal, not real.

 

[NW-Bound]

I know nobody here has a crystal ball, but what range of returns would you all consider using in doing this forecasting exercise? A very low rate would suggest that DH doing some part time work makes sense, so it has a bit of impact on lifestyle to assume very low numbers.

FIRECalc gives me a range of return. At the rate I am spending, I could be empty handed in 30 years (unlikely that I last that long), or I could become a decamillionaire.

When I add SS into the mix, whatever I can get is a bonus, and that should help me stay afloat. And that's all I think I can get out of all this prediction business. No fancy spreadsheet for me, as I do not know what numbers to put into it with confidence anyway.

And the truth is that if the future plays out like the worst case that FIRECalc shows, I would be cutting back expenses rather than continue to spend as I do. That should also help.

 

[target2019]

I think the discussion started out with a mention of 8%. Keeping it real!

 

[pb4uski]

But the 8% is a nominal rate for a 60/40 portfolio, not a real rate.

 

[target2019]

I am trying to keep it real.

 

[NW-Bound]

Indeed, if I will get 8% return in the next decade, even if inflation runs 3-4%, I still have some left over after withdrawal. My stash may not grow much if inflation is considered, but in nominal terms, I will be thinking that I am getting richer.

I feel that's too good to happen. So, if I manage to stay constant in nominal terms, I will have to be OK with that, and just wait patiently to claim SS when the time comes.

 

[Mulligan]

Wouldn't an 8% assumed return on a 60/40 plan using "historical ave" not be an applicable assumption since the 40% part is so far below the historical average? I am not saying it isn't attainable, but wouldn't that put a lot of pressure on the 60% side to considerably outperform?


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[NW-Bound]

If people get desperate and pile into that 60% to get some returns, then it becomes a self-fulfilling prophecy.

That is until it [-]crashes[/-] stops being so.

 

[Ready]

As Mulligan pointed out, I'm concerned that the ultra low interest rate environment we are in would make it pretty difficult to achieve a blended return of 8%. And, we've been in a bull market for quite some time, so it's hard to imagine seeing above average returns for the next decade.

I'd be happy to get 5.5%, but with bonds contributing around 1-2%, getting the overall return up to 5.5% would put a lot of pressure on stocks to perform quite well for the entire decade. It's certainly possible, but not something I want to count on.

 

[target2019]

Here is a link to a google sheet that has 2 tabs. First tab is the original sheet downloaded from somewhere or another. Second tab is simplified, to reduce the number of entries to make it easier to change AA.

https://docs.google.com/spreadsheets/d/1d-KoYdRgngSapr_ysohwNIVyujHMSZp5-Ebcvqkjd9k/edit?usp=sharing

Anyone can comment on it. If you need a copy that is possible.

I noticed it doesn't check for divide by zero error, so I added 1% cash. Did not want to delete that row.

You just change cells that are green-shaded.

I did not create the formulas for this sheet. I do something similar in my own investment sheet. I use a factor of 1.02 for bond funds and 1.05 for stock funds.

 

[racy]

I have no idea, but Vanguard has a research paper on expected returns over the next decade. A quote, "...simulations indicate that the average annualized returns of a 60% equity/40% bond portfolio for the decade ending 2024 are expected to center in the 3%–5% real-return range...".
The full paper, here: https://personal.vanguard.com/pdf/ISGVEMO.pdf

 

[Mulligan]

Most people here seem to need extremely low returns for their retirement plans to work. I would be very nervous if my plans were built on a needed 8% return going forward.


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[NW-Bound]

I have no idea, but Vanguard has a research paper on expected returns over the next decade. A quote, "...simulations indicate that the average annualized returns of a 60% equity/40% bond portfolio for the decade ending 2024 are expected to center in the 3%–5% real-return range...".
The full paper, here: https://personal.vanguard.com/pdf/ISGVEMO.pdf

I would be happy with that. It would mean that I can spend my WR and still have my stash keeping up with inflation. Seeing it growing up in nominal terms gives me a warm fuzzy, however phony, feeling of having more and more. And then, there's SS. What more does a retiree need?

 

[pb4uski]

So assuming inflation of 2% that would put nominal returns in the 5-7% range... seems sensible.

 

[daylatedollarshort]

Most people here seem to need extremely low returns for their retirement plans to work. I would be very nervous if my plans were built on a needed 8% return going forward.

That is my plan - more or less live off SS + pensions once the kids are out of college. Higher portfolio returns would be great but we aren't counting on them.

We do work part-time but mostly hobby stuff we would do even if we weren't paid and I don't put that income in the plan, so we can use that income and extras like frequent flyer rewards for savings or fun money.

 

[Mulligan]

That is my plan - more or less live off SS + pensions once the kids are out of college. Higher portfolio returns would be great but we aren't counting on them.

We do work part-time but mostly hobby stuff we would do even if we weren't paid and I don't put that income in the plan, so we can use that income and extras like frequent flyer rewards for savings or fun money.

Dont feel bad, I am less diversified. I just live off a pension and am 11 years away from collecting my SS which will be $105 a month. Hope I make it to 62 so I can cash in!
While I am collecting a nice war chest of preferred stocks that generate nice supplemental income that I reinvest, plus continue to save from my pension income; at my age if my pension went away tomorrow, I would be back to work very soon! Wait, I really haven't worked in 5 years so I have now become so lazy, I would probably be better off staying for free at a minimum security prison the rest of my life.


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[Sycamore]

U.S. large cap dividend yields have been trending down for the last twenty years, total bond market yields are low, both could very well have be a drag on future returns.

If you read the research from Jeremy Grantham of GMO you'll find some interesting medium term forecasts.

No one knows for sure what the future holds but if you plan for a lower than average return, and returns trend to historic averages then you can enjoy the benefits of your careful planning.

 

[daylatedollarshort]

Dont feel bad, I am less diversified. I just live off a pension and am 11 years away from collecting my SS which will be $105 a month. Hope I make it to 62 so I can cash in!
While I am collecting a nice war chest of preferred stocks that generate nice supplemental income that I reinvest, plus continue to save from my pension income; at my age if my pension went away tomorrow, I would be back to work very soon! Wait, I really haven't worked in 5 years so I have now become so lazy, I would probably be better off staying for free at a minimum security prison the rest of my life.

We're actually pretty happy at how low we are getting our overhead while keeping the same basic lifestyle (except for the full time work part) we had when we were both working full-time. I do not think spending more would make us happier. I like the idea of still saving money in retirement and not drawing down much if anything from the portfolio (except for taxes on RMDs). I'm fine with leaving the house and portfolio to charity and the kids.

 

[Lucantes]

I use 5% return for any calculations I do looking at a future value of standard market investments (and I figure it includes inflation etc.).
Doesn't mean it is right or wrong but it is what I have decided to use and I use it consistently in any calculation I do (future 401K value, taxable investments etc.).
If it ends up being too high then I hope our planned less than 4% SWR will carry us through, if it ends up being higher then we get more fun money to use. YMMV however.